Wednesday, December 24, 2014

Are Keynesians "Desperate" About the 1921 Recession?

So, Robert P. Murphy would have one and all believe, based on a post by him out of the Mises Institute of Canada on Dec. 22. His post seems to be triggered by a mistaken comment I made to my own post here on the 1921 recession, although it did not appear in the main post itself and was not part of the main argument. Murphy has long been one of those arguing that 1921 is indeed a role model for studying later downturns, with the supposed bottom line being that economies will bounce back on their own from sharp downturns if prices and wages are flexible and there are no efforts at monetary or fiscal stimulus.

My post argued that there was monetary stimulus in 1921 and noted that even though there was downward stickiness of wages in 1945-46 and also in 1982, there were rapid bouncebacks with monetary policy in particular being stimulative during those episodes (and fiscal policy also being so in the 1982 one under Reagan). Murphy's post has nothing to say about those episodes, meaning, I guess, that he is desperate with this post to distract from the complete failure on his and his allies parts to address these points.

So, let me confess and apologize for the mistake I made in one of the comments to my own post. I falsely claimed that Commerce Secretary Hoover (under Harding) had initiated stimulative public spending in 1921, which, while it did not kick in until after the bounce happened, aided the move out of the recession. This was inaccurate. Hoover proposed such spending, but his proposals were not accepted. He did increase public spending after 1929, as I also noted, and which Murphy does not dispute, indeed revisits and reiterates.

So, does this mistake on my part in this comment indicate "desperation," or is it those failing to reply to the arguments in the main part of my post (still waiting to see those) who are desperately floundering around for an appropriate response? Murphy usefully provides data on federal spending during the period, and indeed it fell. However, by far the largest decline he shows in his post was between 1919 and 1920, when federal spending fell from about $18 billion to merely $6 billion in 1920. Murphy does not think that this sharp fiscal contraction had something to do with the collapse of the economy in 1920? It is true that federal spending continued to decline, but it did so at a very slow rate. So, it was $5 billion in 1921 and down to $3 billion in 1922, after which it stabilized. So, yes, the pressure of fiscal policy was downwards, but nothing like 1919-20. Murphy disagrees about monetary policy, but I shall not repeat the arguments here, and he does not present them again.

He also shows spending during the Hoover presidency. Again, I agreed with him that those criticizing Hoover for running balanced budgets were off. FDR ran on a balanced budget platform against his deficit spending. However, while indeed Hoover did engage in public works spending, as I noted in my comment, building the Hoover Dam and a lot of airports, the increase in spending was relatively modest, although notable in percentage terms. So, it was $3 billion in 1928 and 29, but had only risen to $4.5 billion by 1932 and 1933, to be compared with the $18 billion in 1919 and the $6 billion in 1920, much more stimulative than what Hoover had going after 1929, even if he had a rising trend.

Again, my story was more about monetary policy, and I repeat that neither Murphy nor any of his allies has even remotely responded to my points about what went on in 1945-46 or 1982. There was a -12.7% change in GDP in 1945 with the fiscal spending decline, but also a quick bounceback the following year, like after WW I, but with downward wage stickiness and an expansionary monetary policy. 1982 also saw a rapid bounceback, but I leave it to anybody interested to go back and look at my original post that lays out further details, including commentary on our more recent case, which does not remotely resemble 1921. The point that one might not be able to infer anything at all today about what policy today should be based on what went on in 1921 remains I believe both valid and pretty straightforward. Looks to me like those disagreeing with this are the desperate ones.

17 comments:

Barkley, the ideological anti-Keynesians (Austrians, libertarians) identify what they call Keynesianism with the policy tools, as if to be a Keynesian meant you had an affinity for fiscal deficits and/or monetary stimulus. Of course, the periodic desirability of these tools is certainly one consequence of having a Keynesian analysis. But K-ism is about an analytical view of the economy in which shortfalls in demand reduce employment and income and can persist longer than they need to (possibly for a very long time) in the absence of a policy response.

It's a sort of reverse projection on their part to think that, because they have an ideological distaste for government spending and monetary injections, their opponents must have an ideological attraction to them. We don't. We have an analysis of how the economy functions, and we choose policies based on what that analysis tells us.

It's entirely possible, for instance, that a Keynesian could look at a particular recession (accompanying conversion at the end of a war, for instance) and conclude that no policy response is required. Some contractions may well be self-correcting. It's about the analytical model, not a policy fixation.

As long as respectable economists promote the nonsense idea that "equilibrium" is a useful concept in the understanding of a complex system created by dynamic and idiosyncratic agents, there will be those who take equilibrium analysis to its necessary logical conclusion.

No amount of contrary examples can change the fact that the Mises crowd's logic is correct. And correct logic is revered in economics.

There ought to be a term for accusing your opponent of what you are most guilty which is indeed common but desperate may be too strong for them as that would imply they actually have a model rather than just carefully selected anecdotes to support their own predetermined conclusions. The only facts that matter are their own beliefs; all others are to be avoided least they lead to wrong thought.

Good heavens, here I am just after midnight on Christmas Eve, now Christmas, commenting on one of my blogposts. But, heck, better get it done before I go to bed, :-).

Peter,

Thanks, could not agree more.

Lord, likewise.

Lord,

Are you aware that I am one of the leading experts in the world on complexity economics? If you are not, please check out my website, not updated for several months unfortunately due to local IT issues. But it is at http://cob.jmu.edu/rosserjb .

Anyway, let me simply note that I am one of the very small (although growing) group of economists that is interested in the somewhat small while nontrivial overlap between Keynes and Hayek (and some other Austrians). That overlap certainly involves complexity issues, including your concerns about out of equilibrium dynamics. I know it is annoying to have somebody send you to a website, but, really, you need to read some of what I have written, not just some, but a whole lot.

Ooops. Last part of my comment was for Thornton, although probably anybody still paying attention has figured that out.

So, again, I hope that Santa and Jesus and anybody else out there who might be nice to you on this day is. After all, even though oil prices are falling, I do not think any of us wants to have a lump of coal in our stocking in a few hours, :-).

I was not aware of that. I always enjoy getting pointed toward more learning. It's the best gift there is.

This is totally self-serving (but so is all of econ for the elites who propagate it) but I honestly think my ignorance is essential. A PhD has invested what? Eight years in the idea that markets clear (despite all the rotten apples at real apple stands)? It's really only from a position of ignorance that one can understand how someone could see the truth (complexity) and yet continue to defend the patently false (equilibrium).

The less ignorant one becomes, the more he thinks that there must be something useful in all that sunk time investment.

To say that equilibrium is still applicable in some situations would be like Big Bang theorists holding on to steady state formulas and teaching them to undergrads as good approximations of the truth.

If you are an expert in complexity and you blog, how can you not devote every blog post to the methodological confusion that allows Cochrane and Krugman to call their ideological prejudices the conclusions of theory? How can you rest knowing that Noah Smith doesn't understand that "theory" means different things in different settings? How can you nod along as Dorman does math and claims to predict the future of human innovation?

These are the questions that are obvious to the ignorant.

Seriously, I'm very excited to learn more about complexity theory and hope your writing is accessible.

Barkley - I just added my 2 cents by trying to calculate what happened to the real value of M2 over what I think is the relevant period. I confess not to be the best of economic historians but I was shocked at how Robert Murphy and his camp was so focused on nominal figures during a period when prices were dropping.

I think a lot of blame goes to post modernism, the idea that there is no true observation, that we all start with theory and the observe accordingly. I think this is part of what accounts for the confusion between "less wrong" and "more right" so perfectly demonstrated in your closing reference to physics.

Einstein contradicts Newton by being "more right". Newton, within the proper scope, is not wrong. He is less general. Einstein is more complex but more complete. He can predict the acceleration of an apple falling as well as the behavior of that apple as it approaches the speed of light.

Rational expectations is not Newton. Equilibrium is not Newton. Human behavior is not rational. It just isn't. Prices aren't set were supply and demand meet. They just aren't. There is no proper scope where these ideas work. There has never been an evidence to contradict the rotting fruit in the dumpsters behind every grocer in Anerica.

Now, bounded rationality does sort of match the world. It's "less wrong" than rational expectations. Complexity sort of leads to "shocks". That idea is less wrong than RBC.

You go from more right to less right when the simplicity of F=ma gives the right answer. But going from less wrong to wrong isn't a simplification. It's just... Wrong.

That's why Noah Smith's arrogant bumbling thru the philosophy of science is so excruciating. Yes you start with theory, but the magic happens when the world comes crashing thru. If those orbits *aren't* circles, but rather ellipses, then...•Insight* *Revolution*!

You get to that same juncture where equilibrium is circular orbits and instead of revolution you say, "Well isn't this a very interesting *special case*.

But in every single other empirical endeavor in human history it's the special cases that reveal what's really going on! Abnormal psych teaches us how the normal mind works, earthquakes teach us what forces are *always* at work on the Earth's crust, hurricanes the weather, unique Finch beaks evolution, supernovas the stars, and on and on.

Use the ladder of John Stuart Mill to see what you can, but then discard it in favor of insight. Holding on to that ladder is literally killing people every day.

Not bad, although I would say you are sounding more like early Wittgenstein than J.S. Mill on that last bit. As it is, or was, Mill was an early student of the complexity idea of emergence, but in his philosophical writings rather than his ones on economics.

I wish to apologize for coming across as pompous earlier. Sometimes I get that way, but then I realize later this is a foolish vice of mine. As it is, in case you have not figured it out, none of us here at Econospeak are particularly conventional in our views of economics, even if we have our own disagreemetns with each other and our own agendas and drums to beat. Even grumblers like Noah Smith are generally more conventional that pretty much any of us.

I was deliberately Wittgensteinian. The ladder metaphor from the Tractatus is still a good one in the view post PI.

Mill I actually no very little about. I was surprised when I learned how seminal he was in the field of economics. I stopped reading when he defended utilitarianism by claiming the pastimes of the rich are superior to those of the poor without much in the way of argument.

On the apology: that I can interact with someone disciplined and focused enough to be an expert anything is quite a privilege. Us ADD types haven't been so lucky since the dawn of agriculture.

I can't say I know where that line is in Mill, although he may have said it. It should be kept in mind that he wrote a lot and that his views changed over time, becoming more pro-socialist as he got older.

I am one of those who think that Mill is currently underappreciated and undervalued among economists. Much of this is that he simply gets read and studied very little, being generally viewed as a late stage classical who was not up on the neoclassical marginalist revolution, sort of the concurrent mainstream rival of Karl Marx. Thus, the view among most mainstream economists today is that he was wrong about a lot of basic things (insufficiently utilitarian in fact), but that what he was right about was absorbed by later neoclassicals like Marshall and is not worth bothering with or reading about in his own work.

I would contend that what he was wrong about is not so much his lack of marginalism, but his super strong assertion of Say's Law, which was first labeled as such and pushed more strongly than Say himself did by Mill's father, James Mill. OTOH, Mill was very insightful and advanced about certain matters of considerable concern now, such as speculative bubbles and crashes, regarding which he his analysis is worthy of both Marx and Keynes, although most modern economists do not know that Marx in Vol. III of Capital had quite a sophisticated discussion of speculative bubbles and crashes. Both Marx and Mill, along with Keynes, recognized that these could lead to recessions and depressions.

Mill was also ahead of the curve on quite a few other ideas in economics, although some of these were not understood at the time and only realized much later, such as the fact that he was the first to formulate the concept of nonlinear programming in his discussion of foreign exchange rate determination in one of the later editions of his main book on Principles of Political Economy.

In his own day, Mill was widely regarded as a genius, a former child prodigy, and an enormously influential public intellectual, whose personal shift from a more purely free market stance towards a moderately socialist also signaled the shift in classical liberalism that would lead us to the current situation where in most of the English-speaking world, the word "liberal" implies supporting some forms of government intervention in the economy, certainly more than was supported by the older classical liberal economists such as the more widely read Adam Smith and David Ricardo.

Just to follow up on that, Mill's shift in his "liberal" views preceded slightly a similar shift in the views and positions of the British Liberal Party, which had adopted some of his reformist views allowing for government intervention to help offset poverty by the time of Lloyd George in the early 20th century, if not so much in the time of Gladstone, more his contemporary. It is also a fact that Keynes himself was a member of the Liberal Party, and by his time this perspective dominated the party, although it fell from power after WW I, with the British Labour Party supplanting it as the main party opposing the Tory Conservatives, and they have never led a government since, although their successor, the current Liberal Democratic Party is currently in a coalition with the Tory Conservatives in UK, with the Tory Cameron as PM.

Having read Mill strictly in the context of moral philosophy, I clearly have missed some of the best parts. I should have guessed as much, as moral philosophy makes fools of almost all who attempt a systematic approach. We're I back in school, I would be deeply into pragmatic approaches, but one only has so much time.

While we're on a Mill appreciation roll, let me put in a good word for his labor market analysis, which recognized what we would now call segmented labor markets and therefore rejected Adam Smith's view that dangerous or otherwise objectionable workplace characteristics would give rise to a compensating wage differential. I cited him for this in Markets and Mortality, although his use of words in describing "less desirable" workers is highly pejorative.